Penalty Codes on Your Transcript: TC 166, TC 276, TC 176 and Their Abatements

Penalties are often the part of an IRS balance that grows fastest and makes people angriest. On the transcript, they are also the easiest part to read, because each type has its own code. Once you can name the penalties on your account, you can ask the right questions about removing them.

The main individual penalty codes

The manual versions are entered by an IRS employee. Document 6209 lists TC 160 for business master file accounts and says it is a failure-to-file penalty "manually computed by Audit or Collection" and "not recomputed by computer." The computer-generated versions are calculated by the master file and can be recomputed as the account changes.

TC 240 is the catch-all. Document 6209 says it posts when "a miscellaneous type penalty is assessed (i.e., other than those penalties which are identified with their own TC or reference no.)." Each TC 240 carries a penalty reference number that identifies which penalty it is.

Failure to file: TC 166

Document 6209 describes TC 166 as a "computer generated assessment of Failure to File (FTF) Penalty on returns posted after the due date without reasonable cause," computed "on the assessment tax less pre-payments."

The statute is IRC 6651(a)(1). The penalty is 5 percent of the tax required to be shown for each month or fraction of a month the return is late, up to 25 percent in total. IRC 6651(b)(1) reduces the base by tax paid on or before the due date and by credits that can be claimed on the return. That is why a late return with full withholding may carry little or no failure-to-file penalty.

IRC 6651(a) also sets a minimum penalty for an income tax return filed more than 60 days late: the lesser of a statutory dollar amount, which is adjusted for inflation under IRC 6651(j), or 100 percent of the tax required to be shown. If your late filing penalty looks large relative to a small balance, that minimum may be why.

Fraud changes the math. IRC 6651(f) increases the rate to 15 percent per month and the cap to 75 percent when a failure to file is fraudulent.

Failure to pay: TC 276

Document 6209 describes TC 276 as the "computer-generated FTP Penalty assessed if return liability and/or Examination/DP Adjustment is not paid on or before date prescribed for payment."

IRC 6651(a)(2) sets the rate for tax shown on a return at 0.5 percent per month or fraction of a month, up to 25 percent. IRC 6651(a)(3) applies the same rate to tax not shown on the return, such as an exam deficiency, if it is not paid within 21 calendar days of notice and demand, or 10 business days if the amount is $100,000 or more.

Three adjustments matter on a real account.

• Overlap. IRC 6651(c)(1) reduces the failure-to-file penalty by the failure-to-pay penalty for any month both apply. You do not pay both in full for the same month.
• Levy notice. IRC 6651(d) raises the rate to 1 percent per month beginning after the day that is 10 days after a notice of intent to levy under IRC 6331(d).
• Installment agreement. IRC 6651(h) cuts the rate to 0.25 percent for any month an installment agreement is in effect, for an individual who filed the return on time, including extensions. Document 6209 lists TC 971 action code 063, "Installment Agreement. FTP at ¼%."

Because TC 276 keeps growing until the cap, the transcript usually shows it in pieces: a first TC 276 at notice time, more as later notices go out, and an accrued penalty line at the top for the part not yet assessed. Document 6209 lists TC 971 action code 262 for "Maximum Failure To Pay Penalty Assessed." Once that posts, the penalty has hit the cap.

Estimated tax: TC 176

Document 6209 describes TC 176 as a "computer-generated assessment" of the estimated tax penalty "for failure to make adequate ES payments." TC 170 is the version computed from the return or manually assessed. TC 171 and TC 177 abate them.

The estimated tax addition is computed under IRC 6654. Two technical points come straight from the statutes you can see referenced elsewhere on the transcript. The failure-to-pay penalty in IRC 6651 does not apply to estimated tax, per IRC 6651(e). And the daily compounding rule for interest in IRC 6622(a) does not apply to the 6654 computation, per IRC 6622(b). The estimated tax penalty is its own calculation.

Reading abatements

Each penalty has a matching abatement code, and the abatement tells you what happened.

Computer-generated abatements, such as TC 167 and TC 277, usually mean the underlying numbers changed. Document 6209 says TC 167 abates the computer-generated failure-to-file penalty "when a change occurs in return due date or tax due at due date," and TC 277 is the computer-generated abatement of the net assessed failure-to-pay penalty. If tax comes off, the penalties computed on that tax should come off too.

Manual abatements, such as TC 161 and TC 271, are usually the result of a request: reasonable cause, first-time relief or a correction. Document 6209 notes that a manual TC 271 restricts the computer's penalty computation for the module unless it is input with reason code 62. If you received a penalty abatement and later see the penalty recomputed, ask whether the restriction was set.

The National Taxpayer Advocate's transcript examples show a TC 166 penalty followed by a TC 167 with a matching negative amount described as a reduced or removed penalty. That is what a clean abatement looks like.

Penalties on a substitute for return year

If the IRS prepared a substitute for return, IRC 6651(g) changes the penalty math. The SFR is disregarded for the failure-to-file penalty under 6651(a)(1), so it does not cut that penalty short, but it is treated as your return for the failure-to-pay penalties under 6651(a)(2) and (a)(3). On the transcript, an SFR year therefore tends to carry both a large TC 166 and a growing TC 276. Filing your own return can change the tax, and the penalties computed on it, but only after it is processed. See Substitute for Return on Your Transcript.

When an abatement request is denied

Document 6209 says "TC 290 with zero amount blocked 96X indicates a taxpayer penalty abatement request was considered and rejected." It also describes an Appeals abatement refusal indicator, set by a TC 290 blocked 960 to 969, after which abatement codes such as TC 161, TC 271 and TC 281 will not post until a TC 290 blocked 970 to 979 releases it.

A denial is not always the end. Penalty appeals exist, and Document 6209 lists TC 971 action code 251 for a tax period under consideration by Appeals as a penalty appeals case. The firm's main site has an overview of penalty abatement.

Interest on penalties

Penalties draw interest, but on different schedules. IRC 6601(e)(2)(B) imposes interest on the failure-to-file addition from the return due date, including extensions. IRC 6601(e)(2)(A) imposes interest on most other penalties only if they are not paid within 21 calendar days of notice and demand (10 business days if $100,000 or more), and then only from the date of notice and demand. When a penalty is abated, the interest computed on it should come off too. More in Interest Codes on Your Transcript.

A penalty review routine

• List every penalty code on the year and total each type.
• Compare the return received date to the due date to test the failure-to-file penalty.
• Look for TC 971 AC 063 to see whether the reduced installment agreement rate applied.
• Look for the levy notice date to see when the 1 percent rate started.
• Check whether any abatement left the penalty restricted.
• Decide which penalties have a basis for relief, and ask for it in writing.

Penalties are not punishment for owing money. They are statutory add-ons with specific triggers, and each trigger can be tested against the facts. The transcript gives you the dates and amounts to do that.